On 8 October 2018, the Securities and Futures Commission of Hong Kong (“SFC”) and the UK Financial Conduct Authority (“FCA”) issued a Memorandum of Understanding (“MoU”) pursuant to which certain Hong Kong funds and UK funds may be distributed in each other’s market through a streamlined process. A stated purpose of the MoU is to offer consumers greater choice and diversification in their investments by facilitating access to a greater range of funds.
Scope of the MoU
The cooperation seeks to increase collaboration, effectiveness of the ongoing supervision of covered funds and covered management companies (collectively referred to as “covered entities”), and matters of mutual supervisory interest, including regulatory developments between the SFC and the FCA.
The increased cooperation has been found necessary in light of global financial market growth and increasing cross-border activity in asset management and the offering and distribution of collective investment schemes (“CIS”). As such, the MoU seeks to enhance cooperation in relation to:
- CISs domiciled in either Hong Kong or the UK and which are offered to the public in either Hong Kong or the UK on a cross-border basis; and
- management companies based in either Hong Kong or the UK.
Each of the SFC and the FCA will remain responsible for regulating and supervising the offering, marketing and distribution of covered funds within their respective jurisdictions.
For the purpose of the MoU, a covered fund is a UK undertaking for collective investment in transferable securities (“UCITS”) and/or a Hong Kong CIS which is seeking authorisation in Hong Kong or recognition in the UK on a cross-border basis in accordance with the MoU. Such fund shall comply with the applicable domestic law in the host jurisdiction with regard to the offering, marketing and distribution of the covered fund.
A covered management company means a UK management company or a Hong Kong management company:
- that is authorised in the UK or licensed/registered in Hong Kong by the relevant authority to manage covered funds; and
- that meets the applicable conditions set out in the MoU.
Application procedure in Hong Kong and the UK
Provided that the covered fund meets the applicable conditions and requirements, an application is considered by the respective authorities through a more streamlined process and in accordance with domestic law, namely the Securities and Futures Ordinance (“SFO”) in Hong Kong and the Financial Services and Markets Act 2000 (“FSMA”) in the UK.
In accordance with section 272 of the FSMA:
- Hong Kong covered funds must offer adequate protection to participants in the scheme;
- the arrangements for the fund’s constitution and management must be adequate; and
- the powers and duties of the operator and trustee or depository must be adequate.
Furthermore, a Hong Kong covered fund applying for recognition in the UK must maintain facilities for investors in the UK as required by the FCA, Collective Investment Schemes sourcebook (“COLL”) 9.4.
In addition to complying with section 104 of the SFO, UK covered funds shall also comply with a set of requirements as outlined in the MoU, which includes but are not limited to:
- appointing a firm in Hong Kong as its representative;
- investors in the UK and Hong Kong being notified in the same form at the same time about any changes to the fund by the UK covered management company; and
- the sale and distribution of the fund in Hong Kong being conducted by licensed or registered intermediaries in compliance with relevant laws and regulations.
We expect that the increased cooperation, to some degree, will smoothen the cross-border authorisation process in both jurisdictions and are hopeful that it is a first step in increased efficiency in this global market.
On 29 March 2019, the UK will leave the EU and with the Brexit approaching it is encouraging to see the FCA promote the UK market in jurisdictions outside the EU and further progress in this regard is highly welcome in order to maintain the UK’s global lead in the financial markets. This in line with other initiatives by the UK Government, including the so-called ‘FinTech Bridges’, the agreements on financial technology (“FinTech”) collaboration and cooperation between the UK and Hong Kong, Singapore, Australia and other jurisdictions, respectively, will help maintain the UK’s position on the forefront of international finance.
Our Global Funds Team monitors the international developments in these markets. To better understand how this development may affect your business, please feel free to contact us.
Photo from the SFC: SFC CEO Mr Ashley Alder (left) with FCA Executive Director of Supervision – Investment, Wholesale and Specialist Division Ms Megan Butler (right) after signing the Memorandum of Understanding on United Kingdom-Hong Kong Mutual Recognition of Funds